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Watsco Up on Earnings Beat

Watsco Inc. (WSO - Free Report) shares have gained since reporting record fourth-quarter and fiscal 2013 results on Feb 13. Adjusted earnings came in at 50 cents per share, up 22% from 41 cents earned in the year-ago quarter. The earnings also beat the Zacks Consensus Estimate by a penny. The growth was aided by higher sales, stronger selling margins and continued operating cost management. Including one-time items, earnings per share in the quarter were 50 cents compared with 4 cents in the year-ago quarter.

Total revenue increased 8% year over year to $827 million and was ahead of the Zacks Consensus Estimate of $808 million. Residential air conditioning and heating (HVAC) equipment sales rose 17% and other HVAC product sales were up 8%.

Cost and Margins

Cost of sales increased 8% year over year to $629 million. Gross profit grew 9% year over year to a record $198 million. Gross profit margin increased 10 basis points (bps) to 24% from 23.9% in the year-ago quarter. Selling, general and administrative expenses increased 6% year over year to $158 million. Income from operations rose 20% year over year to a record $40 million. Operating margin increased 50 bps to 4.8%.

Fiscal 2013 Performance

Watsco reported record earnings per share of $3.68, up 36% year over year from adjusted earnings per share of $3.03, beating the Zacks Consensus Estimate by a penny. Including one-time items, earnings per share stood at $3.68 compared with $2.70 in fiscal 2012.

Cash and cash equivalents stood at $19.5 million as of Dec 31, 2013, compared with $73.8 million as of Dec 31, 2012. Cash flow from operating activities for fiscal 2013 amounted to $150 million. The debt-to-capitalization ratio was 17% as of Dec 31, 2013, compared with 24% as of Dec 31, 2012.

Our Take

Watsco has immense potential in the replacement market given an aging stock of air conditioners and heating systems in the U.S. Watsco’s joint venture with Carrier Corporation, a wholly owned subsidiary of United Technologies Corp. (UTX - Free Report) , continues to generate profits. The company intends to purchase an additional 10% interest in the venture in the Sun Belt region in 2014. This is likely to be accretive to earnings.

Watsco’s intends to improve revenues to above $10 billion and margins above 10% through new product offerings, geographic expansion, and logistical, productivity improvements. However, the volatility in housing starts and lack of potential acquisitions remain concerns.

Watsco currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include Lennox International, Inc. (LII - Free Report) and Avnet, Inc. (AVT - Free Report) . Both these carry a Zacks Rank #2 (Buy).

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